Tuesday, August 08, 2006

A nice Op-Ed about Russia and how its oil wealth will probably lead to more bad than good for the Russian people.

Oil and gas now account for roughly 20 percent of Russia's economy, 55 percent of all its export earnings and 40 percent of its total tax revenues. Russia is the world's second largest oil exporter after Saudi Arabia, and its subsoil contains about 30 percent of the world's gas reserves.

But what's good for the energy markets is not necessarily good for Russia. When oil revenues flood a nation that has a weak system of democratic checks and balances, dysfunctional politics and economics ensue. A strong democracy and an effective public sector help explain why oil has not distorted Norway the way it has Nigeria or Venezuela. A lot of oil, combined with weak public institutions, fuels poverty, inequality and corruption. It also undermines democracy.

The economic effects are more noticeable. A country whose economy relies mostly on oil exports inevitably has an exchange rate that encourages imports and hinders exports. Such an imbalance favors oil at the expense of other sectors, like agriculture and manufacturing, as their products become more expensive abroad.

And while oil generates export revenues and taxes for the government, it creates few jobs. Despite its enormous economic weight, Russia's oil and gas industry employs just two million workers out of an economically active population of 67 million. Also, since the price of oil is volatile, petrostates suffer constantly from boom-bust cycles. The busts leave in their trail banking crises and public budget cuts that hurt the poor disproportionately.

Even the tax revenue generated by oil is a mixed blessing. Petrostates commonly suffer from a narrow tax base. In Russia, for example, the 10 largest companies account for about half of total tax revenues.

It amazes me that oil and gas industries generate 20% of GDP but only 2% of employment.